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Will RBI successfully break the financial logjam?

The biggest headache for the country has been incomplete or underutilized power projects and non-starter road projects due to familiar problems of coal, land and environment. For the banking system, this has meant a pileup of bad loans and worse, a hesitation to lend more money to the sane groups.

The Reserve Bank of India (RBI) last month tried to breaking the financial impasse. It said in the case of loans for existing projects that had commenced production and were generating revenue, banks can take out the balance loan and refinance it as it were a fresh loan.

They can add more or different lenders and spread the loan over the life of the project. At least 25 percent of the loan has to go to new lenders. But a big concession is that while so far, banks gave a maximum of 15 year loans, they can now spread the balance loan over 85 percent of the life of the project or the concession period solely for old loans.

In the case of new loans, unlike the old loans that had to be no more than 15 years, banks can assess them as a 25 or 30-year loan depending on the life of the plant or concession period. However, they can treat it as a five-year loan and at the end of five years, subtract the paid off amount and resell or refinance the balance on new terms, possibly at lower rates because by then, the risky period of construction would be over.

A panel consisting Oriental Bank of Commerce’s CMD SL Bansal, SBI’s Former MD Diwakar Gupta and GMR Infrastructure’s Group CFO Madhu Terdal discuss with CNBC-TV18’s Latha Venkatesh if these two new rules will bring some relief to infrastructure builders by decreasing their load on old loans and giving them some money to finish the more recent incomplete projects thereby indicating less bad loans for banks.

Below is the verbatim transcript of the panel discussion with CNBC-TV18:

Q: The takeout financing which allows you to refinance existing projects, do you think it will be substantially availed off?

Bansal: The advantage is now when we started financing these infrastructure projects starting from 2003-04, by now, roughly one-third of the projects have achieved Cancellation of Debt (CODs) and these projects are eligible for takeout financing.

Good thing is initially we were funding these projects only for 12-14 years, now we can fund it for say if the economic life of the project is for 25 years, we can fund it for extended period of 20-21 years. This additional seven-year period that is available to such projects will ease out the cash flow and then wherever the promoters are facing headwinds and they are not in a position to complete the remaining projects, they will be quite eased and naturally, the banks will be benefitted to a large extent because they will not face the problem of immediate non-performing assets (NPAs).

Q: The issue is whether in the refinancing or takeout financing of an existing project which as you say you probably gave the loan in 2004 or 2007, will the 525 rule apply, will you really be able to extend the loan for 25? Do you think that a lot of projects will come for takeout financing if you are going to be faced with the same period?

Gupta: No, there seems to be a slight contradiction if you go by the letter how it is drafted. The spirit is that you need to give infrastructure companies a longer repayment period. That makes it easier for them to service debt, it makes cash generation for the promoters better, it also takes away stress where it may have come because lot of stress has happened due to external factors. If you go by the spirit of this then I think the rules should apply.

Now to the extent that there is a grey area on this, clarification from RBI will be in order because otherwise there would be banks that would still be constrained by asset-liability management (ALM) in giving a longer repayment period.


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